Blow to banks as indebted get a break
Johannesburg – A new ruling by the Supreme Court of Appeal (SCA) is good news for the indebted, who will be able to get out of debt faster, but holds a frightening prospect for the banks.
The SCA considered the in duplum (double the amount) rule. It means that once in default you never have to pay back more than double the unpaid capital borrowed – even if more interest has been running up.
The in duplum rule has been in SA common law for many years, but didn’t really protect clients.
Say you borrowed R100 and didn’t pay the debt. With interests and charges, the R100 soon ballooned to R200.
If you pay off R50, the banks would classify it as a payment to settle part of the interest, and then charge interest and charges on the remaining R150 until it reached R200 again.
That would happen every time you made a payment which did not settle the capital amount.
This meant you would struggle for years to get out of debt. But in 2007, the new National Credit Act (NCA) attempted to place a real cap on debts.
It imposed a fixed limit on the total amount of interest and charges on unpaid debt, so that you will only ever owe double the unpaid capital amount at the time of default.
So if you borrowed R100, and interest and fees amounted to R300 but you had paid R50 of the capital – you would only owe R100 – double the unpaid capital of R50.
More interest and charges cannot be added as you make payments.
In 2009, following opposition from the banks, the National Credit Regulator (NCR) got the high court to confirm that a ceiling is in place, but the banks took the case to the SCA. They lost.
In its recent ruling, the SCA found that the NCA differs from the common law rule in that it is not only limited to interest but also includes initiation fee, service fee, credit insurance, default administration charges and collection costs.
“The court said this section of the law helped to prevent unreasonable over-indebtedness of the consumer,” says NCR manager of strategy and education, Peter Setou.
This is very good news for consumers, who will now get out of debt a lot faster, says Luke Hirst, managing director of the debt counseling group DebtBusters.
It is expected to hurt credit providers who charge high interest rates of above 40%, as those debts will reach in duplum without breaking a sweat.
But the large banks also face a scary scenario following the ruling, says Hirst.
The interest and fees on home loans could quickly reach double the initial capital amount. Take the example of a home loan client, particularly one with a very expensive property, who falls into default by only R10 a month.
If the bank doesn’t pick up the shortfall, the client can years later claim that he is in default and only needs to pay back double the capital amount.
This could potentially leave the bank with substantial losses.
Bad news for consumers
Another recent court ruling, however, holds bad news for consumers. The case focused on which credit agreements can be excluded from the debt review.
Currently, if you already received a summons about a debt – that debt cannot form part of your debt review. It means that your debt counsellor can’t negotiate to lower the monthly payments of that debt.
“When consumers become over-indebted they can approach a debt counsellor in order for their debt to be rearranged,” explains Setou.
“Normally all the consumer’s credit agreements would fall under the debt restructuring process. This means that the credit provider cannot enforce the agreement and take the consumer to court (issue a summons) or attach their assets to settle outstanding debt while they are under debt review.”
But under the NCA, an exception to this is when the credit provider has already taken steps to enforce a credit agreement. That credit agreement is excluded from the debt review process.
“In practical terms this means the credit provider can then take further legal action against the consumer to enforce the agreement,” he says.
The banks contended that as soon as a Section 129 notice is issued to a consumer, which warns them that legal action may follow unless they take action, this debt is excluded from the debt review process.
“The NCR argued that the notice to a consumer is only a notification and not a step to enforce the credit agreement, because, this will have the effect that if a consumer was even one month in default, their credit provider could issue them with a Section 129 Notice and they would not be able to apply for debt restructuring to help them pay back their debts,” said Setou.
The SCA agreed with the banks’ approach and interpretation of the Act saying that as soon as a consumer received a Section 129 Notice in respect of a specific agreement, that agreement is excluded from debt review.
So far, most banks have been quite lenient on including debts under debt review where a section 129 has been issued, as long as clients are making a decent monthly payment.
Hopefully that will not change, says Hirst.
The latest NCR figures show that the number of South Africans who have fallen behind on repaying debts have increased to more than 8.6m – or 46.5% of credit-active consumers.